How to deploy an extra $500 a month
Dear Liz: We just refinanced our $100,000 mortgage into a 15-year fixed-rate loan at 3.75%. We have an extra $500 a month and want to know what we should do with it. Should we use the money to pay off the mortgage early, increase the contribution to my 403(b), or start a rainy day fund and try to save up to three months of my take-home salary? I’m 44, my wife is 35, and we have three kids ages 5, 3 and 9 months. I would like to retire in 16 years.
Answer: At least two of your children won’t be through college by the time you want to retire, so you may need to rethink your plans unless you have an exceptionally generous pension or a lot of money saved in that 403(b) already.
Most people have better things to do with their money than pay off a low-rate mortgage, and this is especially true for you, given your very low rate and your already short mortgage term. If you’re not already getting the full match in your 403(b), putting the money there is often your best bet. Even if you’re getting the full match, you might want to invest more in your retirement account if you’re not saving enough. You can play with a retirement calculator or talk to a fee-only financial planner to see if your retirement savings are on track.
Once you’re saving enough for retirement, you probably should prioritize that rainy day fund. The fact that you don’t have any savings is worrisome, particularly if you’re the sole income provider. Your initial goal should be to save three months’ worth of your must-have expenses — what you pay for shelter, utilities, food, insurance, child care and loan payments. You may want to expand that goal to six months’ worth of expenses or more if your spouse couldn’t easily return to work, should you lose your job.
Finally, you probably should think about starting college funds for the kids. College educations are all but essential these days if you want your children to make economic progress. (One example: According to the U.S. Census Bureau, incomes for men with only high school educations have dropped 31% in inflation-adjusted terms since 1989.) You may not be able or even want to pay the whole bill for their educations, but any money you save is likely to reduce the debt they would have to take on to get their degrees.
Live now or save for later?
Dear Liz: I’m in my early 50s and in good financial shape. I have no debt and a comfortable savings account and am working toward retirement goals with my wife of 21 years. For years I have lived very modestly (some would say cheaply).
However, recently I had a health issue that is making me rethink my future finances. I was told I had about a 20% chance of surviving this thing and, although I’m OK for now, there is no guarantee it won’t return at any moment. So should I keep planning for retirement, or should I take the “You can’t take it with you” attitude and start having some fun? Of course I know my wife may survive me by many years, so I am not talking about blowing everything, just lightening up.
Answer: Given that all of us are going to die someday, and few know exactly when, financial planning is all about balancing future needs with current fun. Blow too much money now, and you (or your spouse) could suffer for it later. Defer too much gratification, though, and you miss out on life.
Add to that mix the fact that medical prognoses can change. New treatments could extend your life or you could beat the odds and survive this thing.
The prudent thing to do would be to take your situation to a fee-only financial planner and discuss the options. Perhaps you could free up more money for travel or other memorable experiences with your wife in exchange for accepting that if you survive, you may have to work longer than you’d originally planned.
Where to get basic advice about money
Dear Liz: I am embarrassed to ask this, but I desperately need some very entry-level advice about money. Growing up, I never paid attention to finances. Now married for more than 30 years, I am still in the same situation. I don’t know anything about mortgages (including all those papers I signed with my husband), investing or, probably most important, retirement. Where should I start? Remember, I don’t even know financial lingo, terminology, anything. And now that I am older, I would appreciate some guidance.
What book would you recommend for the person who knows absolutely nothing about finances? Life scares me at this point.
Answer: Please don’t be embarrassed about your situation. You’re recognizing you need help — and asking for it. You’ll be far better off than the spouses who let their partners handle everything and then find themselves adrift because of death or divorce.
An excellent place to start is financial planner Eric Tyson’s book “Personal Finance for Dummies.” It’s an easy-to-read, entertaining book that assumes you’re starting at square one. Once you’ve got that under your belt, you might want to tackle the book Tyson wrote with retirement expert Bob Carlson, “Personal Finance for Seniors for Dummies.”
Another terrific book, from a woman who also started at square one (after losing a small fortune to her husband), is Barbara Stanny’s “Prince Charming Isn’t Coming: How Women Get Smart About Money.”
Don’t worry that you don’t understand what they’re shouting about on financial TV and radio shows. Most of it is nonsense anyway.
You also should talk to your husband about finding a financial planner who can work with both of you to ensure your retirement planning is on track. Even die-hard do-it-yourselfers would benefit from an independent review as they approach retirement, and you can find referrals to fee-only financial planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and the National Assn. of Personal Financial Advisors at http://www.napfa.org.
Not all online degrees are bogus
Dear Liz: I wanted to comment on something in a question you recently answered. The person was concerned about her $40,000 debt for her two-year paralegal studies degree at a for-profit online university. In your response you very correctly cautioned her about the problems that for-profit institutions have been creating for students and the fact that they are being looked into by the Government Accountability Office.
This is great information, but some readers may assume all universities that offer online programs are for-profit and inherently suspect. Many not-for-profit institutions offer very high-quality programs, many of which are online or hybrid. I work for a well-respected, nonprofit university that offers many programs online. I am sure that I speak for many who work hard to offer quality programs online: We deserve to not be lumped together with for-profit schools that do not have the students’ best interests at heart.
Answer: Your point is well taken. Online degrees aren’t inherently worthless when they’re offered by well-respected, accredited institutions. But anyone considering a degree from a for-profit college, either online or off, should investigate the school carefully.
One place to start is searching the U.S. Department of Education‘s site at http://www.ope.ed.gov/accreditation to see whether the school is accredited.
If it is, the next step is to determine whether its programs are the best fit for your needs or if you could get your education for less from a nonprofit vocational school or community college. Many times, you can.
Finally, double-check any school’s claims about the availability and pay of the job for which you’re training. The U.S. Department of Labor site at http://www.dol.gov has statistics showing projected job growth and pay for a long list of positions. It’s worth doing the research before you commit.
Renting isn’t easy with bad credit
Dear Liz: My wife and I sold our house and have to be out by the end of the month, but we can’t find a place to live because of our bad credit. If we don’t move out, we will lose the sale and still have to pay the real estate agent his commission. We’ve applied with about 65 landlords and each one checked our credit, which has caused our scores to fall further. We live on Social Security checks of $1,367 a month. We’re in our 70s and not in good health and we don’t need this stress. Help!
Answer: Having a guaranteed income is attractive to a landlord, but the fact that you’re having credit problems would be a big concern to many. Landlords worry that you’ll mismanage your money and won’t be able to pay the rent.
Not every landlord does a credit check, however. If you steer clear of big apartment complexes run by professional management companies, you may find that individual “mom and pop” landlords are more willing to be flexible — particularly if your credit problems were a temporary problem and have been fixed by selling your home. You may be able to seal the deal by offering to pay several months’ rent upfront, perhaps from the proceeds of your sale, said attorney Stephen Elias, author of “The Foreclosure Survival Guide.”
You can start your search for sympathetic landlords by asking your real estate agent for referrals or checking the rental listings on Craigslist for postings that appear to be made by individuals rather than management companies.
Another option is to ask someone to co-sign the lease with you. The co-signer’s good credit could help you get the place, but if you fail to pay your rent, the co-signer’s credit will suffer.
